A Rocky Start for NTT DC Reit

In what was otherwise a bustling week for Singapore investors, the initial public offering (IPO) of NTT DC Real Estate Investment Trust (Reit) fell flat on its face. The highly-anticipated trust, which kicked off trading on July 14, concluded its first week at a disappointing US$0.95 — a 5% slip from its IPO price of US$1.

Why the Hype and What Went Wrong?

Despite the initial buzz surrounding NTT DC Reit, thanks largely to its focus on data centers and backing from major investor GIC, the trust stumbled at the start. Investors poured in during the offering, with roughly 599.9 million units available, leading to a staggering 4.6 times subscription rate. Yet, this enthusiasm didn't translate to market performance.

Timing seemed favorable as the Straits Times Index (STI) had been on an upward trajectory, closing above the 4,000 mark consistently since July 2. In fact, by last Friday, the STI had climbed to 4,189.50, marking a nearly 2.5% increase for the week.

Market Comparisons: The Stronger Contenders

Investors were also keenly focused on other data-center trusts, as last week’s star performer among STI components was Keppel DC Reit (KDC), which surged 4.1%. Riding on strong recommendations, including a 12-month target price of S$2.40 from Maybank, KDC is set to capitalize on key trends like digitalization and cloud migration, with projections showing a 4.9% annual growth in distribution per unit (DPU) leading up to 2027.

Concerns Loom Over NTT DC Reit's Stability

So, what's souring the optimism surrounding NTT DC Reit? Concerns abound over its projected yield, which is based on a full payout of distributable income, risking sustainability given potential future capital expenses. Furthermore, the Reit is heavily reliant on a small pool of tenants, with its top ten occupying 62.6% of its monthly rent—its largest client, a Fortune 100 US automotive firm, accounting for 31.5%.

Rumors suggest this major tenant could be Tesla, although confidentiality agreements complicate confirmations. Should Tesla face negative headlines, investor sentiment could sharply shift.

Interest Rate Woes Impacting All S-Reits

Amid these pressures, broader concerns about rising long-term U.S. interest rates also loom large. With the current yield on ten-year U.S. Treasury bonds around 4.42%—a substantial jump from below 3% in 2019—investor sentiment is understandably affected. The overall trend has seen the iEdge S-Reit Index lag sorely in recent years, struggling with a modest return of just 4.6% over the past five years compared to the STI’s remarkable 99.3%.

Future Outlook: Can NTT DC Reit Recover?

Despite this rocky beginning, there remains hope for NTT DC Reit. The success of data center-focused Reits cannot be overlooked; after all, KDC and Mapletree Industrial Trust have enjoyed robust performances in recent years.

For NTT DC Reit to regain investor confidence, it will need to demonstrate solid performance against its ambitious projections and strategically acquire new assets that bolster its DPU. As the biggest listing in Singapore since significant regulatory changes, all eyes are on NTT DC Reit—the pressure is on to deliver.

The Bigger Market Picture

As Singapore seeks to invigorate its market, there’s a call for fresh listings that captivate local investors. The recent steps taken by the Equities Market Review Group are pivotal, but ensuring that these new listings engage effectively with investors is equally critical to enhancing the vibrancy of the market.